Euro Area Resolve for Single Currency Faces Greek Test

By Patrick Donahue -
Nov 4, 2012

European leaders’ determination to keep Greece in the euro area will be tested this week as Prime Minister Antonis Samaras struggles to secure political support for measures to assure the country’s financial lifeline.

Samaras pledged yesterday that the raft of wage and pension cuts in the latest austerity package will be the last and that Greek society won’t tolerate any more, according to comments made to lawmakers of his New Democracy party. The first parliamentary vote in Athens may come as early as Nov. 7.

“The Greek risk could come to a head this week,” Holger Schmieding, chief economist at Berenberg Bank AG, wrote in a Nov. 2 note. “Greece matters as a trigger of potential contagion to the much bigger economies of Italy and Spain.”

Negotiations between Greece and its troika of international creditors have sought to keep the country inside the 17-member monetary union. In Athens, coalition leaders are squabbling over the terms of the latest package, while in other European capitals politicians are debating how to ease the country’s debt burden.

As Samaras delivered his warning, he urged lawmakers to cast their votes with the nation in mind. An exit from the euro area would lead to an 80 percent drop in living standards from 2009 levels, while passage of the measures will free Greece from an investment “quarantine,” the prime minister said.

“Those betting that we would fail, those betting on the drachma, for the first time are seeing that they are losing that bet,” he said, according to an e-mailed transcript.

Financing Package

As Greece seeks a 31 billion-euro ($40 billion) financing tranche this month, Samaras is facing down a revolt in his three-party coalition as the country records a fifth year of recession. The leader of the Democratic Left yesterday reiterated his party's opposition to changes in the labor law demanded by international creditors.

No date has been set for a vote on that bill, though it may come as soon as Nov. 7. The budget vote is slated for Nov. 11.

Since the last election, two lawmakers in Samaras's New Democracy party have defected, while Democratic Left has lost one, reducing the coalition’s majority in the 300-seat chamber to 176. Democratic Left contributes 16 of those.

Delay

At the same time, officials from the so-called troika -- the International Monetary Fund, European Central Bank and the European Commission -- have hinted that Greece will get a two-year extension to meet targets in return for the measures.

A year after German Chancellor Angela Merkel and then- French President Nicolas Sarkozy warned that they were prepared to expel Greece, triggering a debate on its potential exit, a failure to overcome this latest hurdle could mark a return to talk over a fragmentation of the euro, Schmieding said.

The debate “could be back with a vengeance despite the clear desire of Germany to keep Greece in the euro,” Schmieding wrote. Such a re-emergence could be a potential trigger of turmoil in the Spanish bond markets and hence of a Spanish request for ECB-backed bailout assistance, he said.

Spanish borrowing costs have eased from record levels in July after ECB President Mario Draghi unveiled a plan to buy unlimited euro-area sovereign debt. While that firewall will probably prevent further upheaval, “the next two weeks are strewn with risks that are worth watching,” Schmieding said.

Investors will also await a Nov. 8 rate decision by the ECB, as economists predict the central bank will keep the benchmark rate at a record low of 0.75 percent, as policy makers wait for Spain to decide whether it needs aid.

Meanwhile, Group of 20 finance chiefs meeting in Mexico City today are set to maintain pressure on Europe having spent three years criticizing its leaders’ crisis tactics. A draft of a statement set for release after the talks conclude warns against delaying the next round of crisis-fighting policies, according to an official from a G-20 country who declined to be identified because the text isn’t finalized.